Inflation and price level are topics mentioned in this section. Don't worry if you don't understand them yet, we will learn more about inflation on subtopic 3.2.
GDP and GNI values can be presented either as:
- Nominal values: measured in terms of prices that prevail at the time of measurement (not adjusted for inflation).
- Real values: taking the effect of inflation into account.
Nominal GDP and GNI may increase as a consequence of either:
- An increase in the real national output.
- An increase in the price level (inflation).
Utilising real values accounts for these increase in the price level of an economy, allowing to truly measure the increase in the national output. This allows economists to make comparisons of economic activity over time.
Calculating real GDP and real GNI using a price deflator
To account convert nominal values to real values, economists use a price deflator. A price deflator is:
- Comparing the average prices during a specific time period to the average prices in relation to a base year.
- Calculated statistically by economics experts.
